Airlines & the PBGC

Guess who’s become a large owner of airline stocks? You, the taxpayer.

The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company’s Chapter 11 reorganization, according to the PBGC’s recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.
The agency is likely to get an even larger stake — between 15% and 35% of new shares — of UAL Corp.’s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it’s likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. — if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.
Taxpayers stand to benefit if the PBGC’s stockholdings increase in value. Stock sales would bolster the agency’s assets that are used to pay retirement benefits, and possibly forestall the need for a taxpayer bailout of the deficit-ridden federal insurer.

By going under, the companies can finally get ditch of their pension liabilities. But then there’s the question of what the government should do as a shareholder.

When companies seek to shift pension plans to the PBGC in bankruptcy, the agency typically becomes a member of the unsecured-creditors committee that tries to recover assets to cover unfunded liabilities. As a member of the committee, the agency can object to parts of a proposed reorganization plan, including mergers or acquisitions. Its primary role as a committee member is to get as big a share of the assets recovered as possible.
The PBGC’s recoveries are often small because of the relatively low standing of unsecured creditors. The agency has gotten some equity stakes in the past and an occasional board seat. It currently has three board seats, including one with Fansteel Inc., which turned over to the agency a pension plan underfunded by $21 million early last year; the PBGC has a 26% stake in the company. The agency couldn’t immediately provide the names of the other companies for which it holds board seats. The PBGC owned 8% of a new Polaroid Corp. holding company that was created in a 2002 bankruptcy proceeding, and sold the stake a year ago for $31 million.
The PBGC takes the position that the government should not take an active role in corporate management or governance. That’s why it assigns one of its 11 money managers — which primarily invest its pension assets — to manage individual equity holdings. J.P. Morgan Chase & Co., one of its money managers, has taken on the role of managing equity stakes because of its experience. As a fiduciary, the money manager’s role is to monitor whether company management is getting the maximum for its investment.

Remember, the Feds actually made a nice little profit with its loan to Chrysler 25 years ago. Normally, I’m a bit wary of government ownership of industries. The usual side effects are huge operating losses, poor quality and endless union troubles. With the airlines, we already have that.
As usual, the Simpsons has something to say on this subject. When Krusty the Clown is indicted on tax fraud, the IRS seizes all of his assets. Krusty Burger becomes IRS Burger.

Homer: Lesse, I’ll have four tax burgers, one IRS-wich, withhold the lettuce, four dependent-sized sodas, and a FICA-ccino.
Kid: Fill out schedule B. You should receive your burgers in six to eight weeks.

Posted by on November 3rd, 2005 at 10:24 am


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